Capco: WTF?

By Felix Salmon

July 31, 2009

Zachery Kouwe has a great article today about Capco, a highly-secretive Vermont-based insurer which looks as though it's massively insolvent:
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Zachery Kouwe has a great article today about Capco, a highly-secretive Vermont-based insurer which looks as though it’s massively insolvent:

By some industry estimates reviewed by the insurance department, Capco could face nearly $11 billion in claims but has only about $150 million with which to meet them. The state is examining whether the company sold policies without the means to cover them, according to a person with direct knowledge of the inquiry who had signed confidentiality agreements.

Capco was in much the same business as AIG Financial Products: selling insurance against the end of the world. Such businesses tend to be extremely profitable most of the time, and then blow up spectacularly. The question is who on earth would ever buysuch insurance, given that the chances of ever getting paid out are slim indeed. The answer? The same people who own the insurer!

Capco was created in 2003 by Lehman and 13 other banks and brokerage companies as a kind of marketing tool. The pitch was that while Capco would not insure customers against investment losses, it would compensate them if the firms failed. Capco promises to provide virtually unlimited coverage above the $500,000 offered by the Securities Investors Protection Corporation and its equivalent in Britain…

Capco, which is private, is something of a financial mystery. Its members include Wall Street giants like Morgan Stanley and Goldman Sachs, banks like JPMorgan Chase and Wells Fargo, smaller brokerage firms like Robert W. Baird & Company and Edward Jones, and Fidelity, the mutual fund giant. Capco was initially registered in New York but later moved to Vermont, where state law enables it to operate without disclosing much about its finances…

It’s unclear who actually serves as the current president of Capco, and the company’s main phone number connects to a recording that tells callers they’ve reached a “nonworking number at Morgan Stanley.”

It seems that these banks’ clients essentially got their Capco insurance for free, which is lucky, because it wasn’t worth anything. But that doesn’t mean they won’t go after Capco’s owners if the insurer fails to pay them what they’re owed. One thing’s for sure: a lot of lawyers are going to get a lot of work out of this fiasco.